Sunday, October 10, 2010

Karratha property boom

I was criticized by some for cherry-picking my houses in the last Australian property post. I did not cherry pick houses – but chose ordinary houses in fashionable suburbs. I stated that clearly in the post. The criticism – if any – was that the suburbs were cherry-picked.

Now I am going cherry-picking. Karratha is a remote town in Western Australia – near the main port for loading iron-ore for its trip to China. It is also near the new ($12 billion) Pluto LNG development.

Land release is limited because the land is owned by the Ngarluma Aboriginal Corporation and this town – more than any other – is the epicenter of the Australian resource boom. I am just going to pick one house from www.realestate.com.au – but there are many others. This is a new house on the edge of suburbia - and you can have it for just over a million dollars.

You get a bathroom too –

This is in – as the Google map shows – a new development in the desert…

And just so you know there is no scarcity value to the real-estate I zoomed out a little:

But there is a bull case. You can probably rent this out for $1500 per week. And the iron-ore boom does not looking like stopping rapidly. However the construction phase of the Pluto project will stop by 2012 and local employment should fall a little then.

20 comments:

one question -- in the US near the top of the boom there was a lot of construction that didn't make economic sense. many of the large developments in florida for example. in new york city there were residential buildings built very close to highways, etc. this was taking place in the middle of a general rise in prices, so that people were probably paying top dollar to build marginal properties. this sort of thing started happening very quickly in 2006-2007. do you see that kind of rapid change in what's built in AU?

Given the increase in prices - why hasn't there been a construction boom? you would think that if prices doubled or tripled it would be very profitable building new houses / apartments. Are all the traadspeople working in the mines?

Last I looked there were an awful lot of people on outer-Western and Southwestern sydney whose household income was below 100K.

Maybe you and I look at different statistics.

If you look at the demographic data by electorates (last published 2006) only 19.9 percent of families in Lindsay (an electorate typical of what you suggest) had a household income above 100K. Its probably less than 25 percent now.

So, you have a country the size of the US and a population 1/15th, but no land to build on, hence prices are double or triple? How much is a cubic meter of tap water if I might ask? I presume it varies.

The marginal cost of a cubic meter of tapwater in Sydney, Melbourne or Perth (all with marginal desalination plants) is about $3.50.

The price is about $1.

This is - of course - stupid.

The marginal price of irrigation water varies - with lowest certainty water at 0.2 cents per cubic meter and highly certain water many many times that - but still cheap compared to tap water in the cities.

1500 a week for 1 million is a 7.8% rental yield. That's not a bubble. A bubble would be where rental yields are lower than, for example, 10 year government bond yields. For example in Miami at the peak, cost of owning a condo might be $3k a month, and it would rent for $1200 a month. So the cost of ownership was 150% higher than it 'should' be.

Here, the rental yield is actually reasonable. 7.8% is a fat yield and probably compensates for a reasonable amount of the risk involved. Even a shift down to a 5% yield (still not absurdly low) would be a big capital gain. It's when the yield is something like 3% or 2% that there is simply no way to make a profit in the long-run.

The proposed Anketell Port is 30km east of Karratha and will be developed by a consortium of iron ore producers who need access to rail and port facilities in the west Pilbara to expand their mining operations..Your post is surprising and pictres are nice.

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